The Right Time For Technology Service Start-Ups To Flourish

Companies are not hiring. Some of the big ones are silently laying-off or not replacing workers lost through attrition. Cash accumulation on balance sheets has reached a level never seen before. Publicly traded companies are buying back their shares in every industry you look at. Stocks in many of these companies are now yielding much higher than Treasury or even corporate bonds. These companies are obviously doing well and CEOs are managing to hold their business afloat in one of the slowest recovery cycles in the US economic history.

Obviously this is good news if you are an investor, but what is happening behind the scenes reveals an opportunity that does not come very often for new entrepreneurs. CEOs are turning a laser sharp focus on their core businesses and on fortifying their market shares even at the expense of lower gross margins. To make their numbers to shareholders, CEOs are trimming out the peripheries and outsourcing anything that does not directly contribute to their core competencies. In house IT centers are being transferred gradually to cloud computing centers. Customer Relation Management (CRM), productivity tools, time tracking, billing, marketing tools, even basic accounting software are being outsourced to specialized companies to host and maintain them in cloud centers. In house custom software, specialized skills, and proprietary systems are becoming a thing of the past. Indeed anything with variable cost and requiring complex management that can be turned into more fixed predictable cost is being tagged for outsourcing.

The trend from CEOs now is to make "Agility" a key strategy to deal with the intense economic uncertainty on a global scale. They have been under pressure to de-leverage in the last 4 years, not just from shareholders and board directors, but more importantly because their bankers have been restricting financing of debts especially when the debt is not being used to directly fulfill immediate sales contracts. Active investors are also pushing CEO to bolster their cash coffers until they know where the market is heading. Investment bankers too are reluctant to finance new projects fearing new regulations in the pipeline that require them to be more liquid, or worse, forces them to separate their traditional banking from investment banking. These uncertainties corners CEOs into a Conservation mode which quite unnatural to every CEO’s instinct when they are sitting on so much cash.

Ultimately all of this is leading to a marked shift from internal skills growth to outsourcing skills that are not directly and immediately needed for the company’s core business. Obviously, none of this is new; we saw this strategy in previous recessions and down business cycles. However, what makes the Conservation and Agile strategies more pressing, and long term ones, is the nature of this particular downturn and global scope of it. In the past, big businesses made use of Global Resources (GRs) as a cheap way to build internal skills and manage growth in emerging markets; simultaneously hitting 2 birds with one stone. They built campuses, call centers, and hired local talents on the cheap. They integrated and streamlined operations, and spent massively to create a fluid enterprise that flows to the lowest cost basin in the world for a workforce. It was a successful proposition and it paid well to the bottom line at the time but now it may backfire! The strategy of spending on globalization and GRs did not anticipate that headcount "Cost Leveling" to happen so quickly. Headcount Cost Leveling is when the cost for skilled workers is no longer differentiated by geography and employers cannot count on finding cheaper workers to boost their bottom line by looking somewhere else in the world. Skilled workers in China, India, and Romania know what their counterparts in the US and Germany are paid and they will not give their employers the same loyalty or productivity unless they receive comparable compensation, benefits, and job security. Furthermore, globalization of operations did not anticipate or plan for a synchronized global economic slowdown from Europe to China. How could they? Prior to this globalization there always were new virgin markets to conquer and a cheaper labor forces to tap into.

The bottom line is that economic uncertainties and the posturing of big businesses that ensued to conserve cash and become agile created a wide opening for smaller and more creative Tech Services providers to fill immediate and pressing needs. They can help these big businesses stay current with a fast moving technology while remain focused on their individual core competencies. This also created a new environment where partnerships can be formed without long term contractual commitments demanded by service tech giants like IBM, Accenture (ACN), CA, Cognizant Technology (CTSH) and others who dominated the scene before. Entrepreneurs, this is your time to shine and make use of talents now in abundance.